The supply chain disruption stories resulting from the disaster in Japan are reaching a ridiculous level. As much respect as I have for Ford and the way they have managed the business through the economy of the last few years, I have to scratch my head at the news of their restricting color choices the dealers can offer because they sourced some of their paint in Japan. Paint! Ford plants in Michigan, Ohio, Illinois, Kentucky and Minnesota can't make vehicles in "Tuxedo Black". Ford bought black paint from a source over 6,000 miles away, rather than from a US source, for reasons that cannot possibly make sense.
Step 1 in minimizing supply chain risk is the avoidance of sheer stupidity. When Ford's marketing people said customers would salivate over Tuxedo Black only available from Japan, more than they would over 'patent leather black' from Cleveland or 'midnight black' from Topeka, that should have been a Three Stooges moment. The purchasing boss should have taken the marketing guy and the accountant who cranked out the numbers justifying the recommendation by an ear and clunked their heads together, sending them packing back to their cubicles.
The supply chain risk wizards, by and large, have one solution to the question of how best to minimize the possibility of running out of stuff like Tuxedo Black paint – inventory. Their answer is for the auto industry to revert back to the days of high overheads excess inventory drives, and poor quality excess inventory creates. They see the manufacturing world in a rather simple minded way: A choice between old school low risk massive inventory, or high risk lean.
Let me help the supply chain risk community by explaining the math:
To keep things simple, let's assume there is a 99% probability of things going OK in China – no revolutions, strikes, meteors sailing into the supplier factory, etc… Let's also assume a 99% probability that things will go swimmingly in Mexico; and a 99% probability that no disruptions will occur in India; and a 99% probability the Canadians won't get fed up with excessive beer taxes and take to the streets with pitchforks; and finally a 99% probability that Detroit will sail through a year without UAW strikes, blizzards or rampant arson.
If the car company were to buy some components from each of those places, their probability of going through the year without supply chain disruption would be 95.1%. That is calculated as .99 X .99 X .99 X .99 X .99 = .95099. On the other hand, if they were to buy everything in the same region in which they assemble – Detroit, for instance – the risk = 99%.
Supply chain management is not like investment portfolio management where you spread things around to minimize risk. Spreading things around actually maximizes risk. Fewer regions equals lower risk.
Buying in the same region in which you assemble is the lowest supply chain risk. More important, there is some risk that your plant will be shut down by a tsunami, beer-deprived Canadians or meteor strikes. When that happens, the fact that your suppliers are also affected really doesn't matter, does it? Regional sourcing actually creates near zero supply chain risk from outside forces. Buying in the same region also has the benefits of better logistics and least environmental impact.
The objection to regional manufacturing is typically cost. Stuff from Asia, India or Mexico is cheaper, so they say (or in Toyota's case, local stuff lacks the necessary Japanese mojo even if it is cost effective). You might want to remember that the cost figures behind this argument are the same numbers that drove Ford to Japan for black paint.
There you have it – the keys to minimizing supply chain risk: (1) Don't be stupid; and (2) put your eggs in the fewest baskets – ideally one.
Jim Fernandez says
I agree. And you never even mentioned the cost and availability of fuel for shipping. Or what a war can do to international shipping.
I’ll never forget working in my Dad’s Mom and Pop grocery store. One day the milk delivery stopped due to a highway accident. I took off to the local mega-market to buy 50 gallons of milk. Who cares if we only made 20 cents a gallon profit on the milk. The important thing was the customers were happy and they brought lots of other stuff along with their milk.
Steve Martin - theThinkShack says
Bill,
I’ve been following many ‘supply chain disruption’ stories since the Japan earthquake. Mainly trying to gain a better understanding of why folks are still struggling with the concept of ‘less complex’ material replenishment.
I’ve commented in a few places, BNET for example, in an attempt to foster more discussion as well as provide thoughts to questions asked. This post, and your previous one about W.L. Gore, provide timely and relevant advice.
So what have I learned? I feel like it’s 1992 and I’m back at Wiremold. Lots of lean misconceptions resurfacing. Once again, the question is raised, “Wouldn’t it be better if we had more inventory?” Big difference now is the globalization game has gotten a lot bigger and folks who wandered down the wrong path will be paying bigger consequences.
Increased globalization of supply chains has turned PDCA into; Plan, Disaster, Chaos, Act stupid.
Looking forward to seeing what companies have been working behind the scenes to simplify their replenishment processes and how they can capitalize on this opportunity.
Doug says
For commodity goods, local sourcing makes sense.
For specialized goods, it gets harder. Many tooling companies (including all the big 3 automakers) source low-volume high-precision tool and die parts from a company called Misumi.
Many low volume metrology/test/vision system components are hard, if not impossible to source locally. Think Futek, Galil, Mitutoyo, etc. Many of these components require 7 figures of tooling to make, rendering them impossible to bring in-house.
It is these components that back companies into a corner…Keep inventory to delivery on time, or wait on the supplier’s often arbitrary, non-lean, lengthy delivery times…Or just tell the end customer that they are SOL?
For commodity goods like aluminum plate, wire, paint, etc. local sourcing is the smart choice.
Bill Waddell says
Doug,
I agree that false economics have driven most of the local sources of such equipment and their components out of the USA and Europe, but there is no structural or economic reason why sources for everything you mentioned cannot be found and developed locally.
Jim Fernandez says
In the many discussions on this subject I have not seen any mention of the cost of materials. Suppose I sell 500,000 wigits a year. And my wigit bracket costs $1 a piece including shipping from Ohio. Or it costs me 50 cents a piece including shipping from Japan. That might mean $250,000 in my pocket. Or a lower price for my customer. The longer supply chain risk might be worth it.
Paul Todd says
Bill:
No argument at all with your central points here, but after reading the Ford paint story I had to look a little deeper.
The item in short supply seems not to be black paint, which as you say can be sourced from many places, but rather a specialty pigment called Xirallic. The supplier, EMD Chemicals, has facilities in the US, but they rely on a special ingredient, apparently from Japan:
“Xirallic® effect pigments are based on aluminum oxide (Al2O3) platelets coated with metal oxides. The Al2O3 platelets are produced synthetically using a crystallization process.”
If this is really the problem, it can’t be easy to just start cranking out synthetically crystalized Al203 platelets somewhere else. That to me is the missing story of all the “JIT is failing” gibberish, that many of the things Japan makes are very difficult to get in other places. Nobody goes to Japan for cheap labor, but plenty of us depend on Japan for specialized products. I suspect we’ll learn about many more in the weeks ahead.
Bill Waddell says
Unless, of course Jim, you want to factor in the costs of handling, counting, carrying and managing all of the inventory it takes to protect that supply chain, and the cost of catching any manufacturing defects so long after they were created that there is no chance whatsoever of meaningful root cause analysis and correction, and the cost of not being able to respond to unexpected increases in customer demand, and the cost of all the obsolete inventory when customer demand unexpectedly dries up. If you ignore all of those things – like traditional accounting systems do, the savings look pretty good.
Paul – I understand but I don’t see what there is in that complicated process that is beyond the intellectual capability of DOW Chemical or any of a number of other US companies. Just because the Japanese do it, that does not mean no one else can do it.
Jim Fernandez says
Yes, your correct. I’m sure it’s more complex that my simple wigit example.
“Paul – I understand but I don’t see what there is in that complicated process that is beyond the intellectual capability of DOW Chemical or any of a number of other US companies. Just because the Japanese do it, that does not mean no one else can do it.”
I wonder how many things there are that we buy, that cannot be made in this country due to our laws; meaning United States environmental laws and other US laws.
Paul Todd says
One law is very much a factor here – the paint additive in question is patented. The last report I saw was that Ford’s paint supplier is searching for a reasonable substitute that will produce a similar glitter effect – you can be sure they will consider the supply chain risks we’re talking about.
Bill Waddell says
Thanks Paul,
Back to my categorizing the discussion as a Three Stooges moment … “the customers will only buy our cars if they are dripping in patented Japanese glitter that can only be had from a plant 6,000 miles away …”
Don Fitchett - Industrial Training says
Another aspect not mentioned, to support local supply (besides reducing risk, which was covered very well here), community support. Buy USA, because USA is your customer. For cars manufactured and sold in Japan, buy Japanese. Because they are your customers. Being loyal to your customers will increase sales to offset cost. Most customers will say, Black paint is Black paint. Or at least would not change preference of car dealer, based on shade of color.
Mike Rorman says
Pity the unwitting customer that has a fender bender in a Tuxedo Black car and can’t get a paint match at the local ford dealership body shop. I guess that the accountants didn’t consider the repair process either, eh?
LITNE says
“You can have any color you want, as long as it’s black. No, wait…”
–H. Ford–
Jim Fernandez says
“You can have any color you want, as long as it’s black. No, wait…”
–H. Ford–
It would be pretty ironic if someday we see a headline that reads, “Ford Motor Company goes out of business after 108 years, because they ran out of black paint.”
Michael Lehrer says
Excellent discussion here and would like to add my 2 cents to the discussion.
1. Purchasing/supply chain should involve themselves as much as possible with Marketing and R&D to understand what the new project means from a sourcing standpoint.
2. Don’t agree with putting your supply eggs into one basket. That opens you up to local risk of a strike, flood, etc. In addition, that could reduce your negotiating leverage (or not).
3. I feel there is an increased need to understand the supplier’s capabilities and THEIR supply chain to be more confident of the potential downstream supply risks.
Cheers
Michael
Paul Todd says
Michael, I think your 3rd point above is the key. I don’t doubt that Ford’s paint supplier is in North America, but at least one of the paint company’s suppliers is in Japan, in the nuclear exclusion zone, no less.
Future discussions will have to better weigh the uniqueness or desireability of a feature with the risks of obtaining that uniqueness.
Be prepared for many more conversations like this. Supplies from many Japanese plants have been in transit since before the earthquake. It’s when the buffer stocks run out that the real problems begin. Paint is likely to be the least of our worries.
Kelvin Watson says
Hi Bill
Unfortunately there is a flaw in your maths. The 99%^5 argument works where a component needs to go through all 5 sites. i.e. failure in one site fails the entire supply chain. In the case you are describing the failure rate of not being able to source an item from one of the 5 sites is actually 1%^5 so reliability will be 99.999999%. Obviously a number of other factors come in such as cost obviously. Requiring reliability at the level above will probably be too high for the additonal cost depending on your supply chain drivers, so a balance between how reliable you want your supply chain and cost needs to be struck
Bill Waddell says
Kelvin,
Perhaps I didn’t make the case clear. My assumption was that a company sources five different components – one each in China, Mexico, India, Canada and the USA. The failure of any one component to arrive results in failure to assemble the completed product. I maintain the probability of all five components arriving, where each has a 99% probability of arriving, is .99 ˆ 5, or .95099.
The company would be better off sourcing all of the five different components in one 99% risk location, thereby realizing a 99% overall risk.
Bill
Kelvin Watson says
Hi Bill
Yes in that case the maths are fine. However the same logic applies to just using one site out of Mexico or wherever if it is deemed to be 99% reliable. The local versus distant sourcing decision is then made up of a number of other factors such as leadtime and cost as both are equally relaible. Perhaps the comparison of reliability of local versus distant sources is better described by describing the extra failure points in the supply chain from a distant source (i.e. the more hands it goes through with each at 99% reliability, the worse overall reliability becomes)
Cheers
Kelvin
Aaron says
Bill, this makes some sense, but, unfortunately, there are a number of other inter-related issues here. Patented products are one.
Coming from the aerospace industry, I see a number of others. “Risk Sharing” is one, which has seen Boeing and Airbus have their share of issues, but those same suppliers have also shared the risk for the components they supply.
We have also seen a European company forced into spreading its supply chain over two countries, simply because thats what they had to do in order to sell to the American market.
Unfortunately, whats best for business, oftentimes gets over-ridden by public perception and politics.